GameStop’s revenue craters on weak fourth-quarter sales, will close more stores

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For years, GameStop has managed to maintain a significant lock on the physical games sale business, even as online sales of games and consoles became more popular online. The company’s current business model may have hit the hard wall of shifting consumer tastes according to its own fourth quarter results.

GameStop’s physical game sales were down by 15 percent this quarter. Excluding Pokemon, sales of the top eight physical titles on the market fell 40 percent year-on-year compared with 2015. Hardware sales declined 29.1 percent, and overall game sales fell 19.3 percent in Q4. There are a few other interesting remarks buried in GameStop’s transcripts. The company CEO, Paul Raines, told investors:

This console upgrades were also not as meaningful as we had hoped. Some have argued that this decline was caused by title fatigue, others have argued for a need for new consoles. And looking more broadly across the general retail spectrum it was obviously a transformational holiday season for a number of hard-line retailers.

Raines also took pains to declare that GameStop’s lousy quarter wasn’t driven by full-game downloads, claiming that these accounted for just 8 percent of game sales in 2016, up two points from 2015. GameStop saw strong Switch sales results, believes the Xbox Scorpio will drive new sales at the end of the year, and generally argued that while the company had a lousy year, 2017 would reinvigorate the market.

Earlier this year, Kotaku reported on GameStop’s “Circle of Life” program, which required GameStop stores to hit certain metrics for pre-orders, reward card subscriptions, used game sales, and game trade-ins. Employees that failed to hit their quotas could result in their store missing quota — and it was clear that this could result in discipline, up to and including being fired.

Why would anyone want to buy a game online when they could experience *this?*Note: Not an actual enjoyable experience.

The problem with this kind of program is that it’s absolutely impossible to tailor to the realities of the video game market. If a new console comes out, people are going to want to buy it, but that purchase could throw off a store’s percentages for the month. The end result was that employees who sold a lot of new games had to sell even more pre-owned games to make up for it. As a result, some employees actively lied to customers, telling them copies of new titles weren’t actually available, in order to push them towards buying a pre-owned version.

Why would GameStop pull this kind of crap? Their own conference call hints at why:

GameStop has an extensive loyalty CRM program known as PowerUp Reward. In 2016, our PowerUp members drove 71% of our sales volume in the United States, so they are very important to us. In addition, they spend roughly 6x that of a non-member, 3x that of a basic member.

The company also noted that its used sales program also declined, but by much smaller margins. Pre-owned revenue fell 6.7 percent in this quarter, but GameStop’s profit margins on pre-owned hardware are still excellent — 46.9 percent for the quarter, 46.3 percent for the full year. This is why the company continues to push the pre-owned idea so very hard. When a new console or game sells, GameStop gets a fraction of that revenue. When they sell that same equipment or title as a pre-owned game, they get 100 percent of the revenue associated with the sale, minus whatever trade-in or cash value they offer the customer at the point of sale.

The company expects new and used software sales to decline significantly in 2017, with some offset from increased collectible sales. The company will close 2-3% of its stores in 2017. These results suggest that Sony didn’t see the uptake for the PS4 Pro that it might have liked (or at least, not as large as GameStop hoped it would be). It’ll fall to Microsoft and Nintendo to reinvigorate this particular market, if either company is capable of doing so.

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